In this issue:

Attack on Iraq 'Unacceptable' Says Ivanov

Glazyev Speaks on Need for National Banking for Development

Kudrin: There Will Be No Default, No Devaluation

Russian Analyst Sees U.S. and World Economic Crisis As Systemic

Russian Raw Materials Policy: In the National Interest, or Resources Grab?

Menshikov Comments on Reports of Kozak Plan

Deterioration of Russian-Georgian Relations

From the Vol.1,No.23 issue of Electronic Intelligence Weekly
Russia and Central Asia News Digest

Attack on Iraq 'Unacceptable' Says Ivanov

Russian Foreign Minister Igor Ivanov told reporters on Aug. 7 in Moscow that Baghdad's invitation to the top UN weapons inspector, Hans Blix, has opened a peaceful way out of the crisis. "Other means, especially forceful, are unacceptable from the viewpoint of international law and could only exacerbate the already difficult situation."

Russia believes it extremely important not to miss the "opening opportunities" for a political and diplomatic settlement. Ivanov said the invitation had "unequivocally shown that Baghdad is seriously considering a possibility of the U.N. inspectors to Iraq."

Glazyev Speaks on Need for National Banking for Development

Economist Sergei Glazyev, currently campaigning for the governorship of Krasnoyarsk Territory in Siberia, gave a webcast press conference Aug. 2 on the pre-announced topic, "Why Has the Russian Government Been Named Among the Least Effective in the World?" In introductory remarks, Glazyev stressed the huge wage arrears to teachers and doctors in Russia, and the government's blocking of proposals— even when President Vladimir Putin has verbally endorsed them— for channeling raw materials earnings into investment for the good of the nation.

Glazyev revealed that during the President's meeting with him, Academician Dmitri Lvov, and other economists last spring, Putin had agreed to their version of a "debt for investment" scheme. Instead of dedicating one-third of Federal budget spending to service the foreign debt, the economists proposed "to refuse to pay on foreign debts in dollars, and to suggest to the creditors to receive the debts in the form of rubles, and the rubles should be spent inside Russia. This is the debt-in-exchange-for-investment scheme, on condition that it will not be converted into dollars, but rather be spent on investment in real production projects."

In a question-and-answer session ranging from Russia's possible "shadow governments" to the vagaries of national monopolies reform, Glazyev singled out the incompetence of Russia's Central Bank, taking the opportunity to develop a concept of national banking.

"The Central Bank has never had the guts," he said, "to start using mechanisms for supporting economic growth, for example, through refinancing commercial bank paper against the bills of solvent borrowers, a mechanism that would make the state implement its basic function, organizing national credit. What is the main function of the Central Bank? It should organize credit within the economy. It should enable industry and agriculture to provide credit for their development. Modern economic growth began in the 18th Century when the states mastered the instruments of the Central Bank and learned to create credits. Our Central Bank has voluntarily given up that main function. Who needs such a Central Bank anyway?"

The solution within Russia, Glazyev argued, "is to deploy a network of development banks. The development bank that will work with state guarantees, with the Savings Bank, that will have mechanisms of refinancing by the Central Bank by extending credits to develop production in priority scientific and technological areas. That is, the spheres that can bring about an economic breakthrough. For example, we have a competitive edge in the rocket and space technology, in the aviation industry, in science-intensive instrument building, such as laser technology, we have some promising results in molecular biology, but we do not have enough long-term money....

"We propose to set up a system of development banks, and to deploy a system of support of small business through special funds in addition to development banks and agricultural banks, to create mechanisms of mortgage crediting of housing through specialized banking institutions in the regions, to deploy an export-import bank that would guarantee and issue export credits to promote the products of our engineering industry abroad."

Kudrin: There Will Be No Default, No Devaluation

Speaking to Interfax Aug. 8, Vice Premier and Finance Minister Aleksei Kudrin excluded the possibility of a devaluation of the ruble or a default on foreign debts in 2003. "I can say today: we are not going to face a default, we'll not have a devaluation which would damage the savings of the population or make them convert them into dollars or euro," Kudrin said.

In commentary in Izvestia, Svetlana Babayeva and Yelena Krop emphasized that the compulsion to assure the population that everything is "okay, really," indicates that something is wrong. "The fact is that after a number of populist social measures, following a number of populist tax measures, the government is short of money," they wrote. According to the paper, "in the next year, we'll have to forget about a budget surplus." Moreover, they added, the growing uncertainty has triggered an ongoing debate between the government and its apparat, headed by Igor Shuvalov, and inside the government— between the group of Gref and the "centrists" close to Mikhail Kasyanov and Kremlin Chief of Staff Alexander Voloshin.

Mikhail Zadornov, deputy head of the Duma's Budget Committee, believes that the contradictions between the ministers and the apparat is explained with attempts to find a scapegoat. "The major problem of the government," said Zadornov, "is that it works by inertia, which means stagnation. When the threat of a continued recession in the United States is regarded as serious, and when nobody can provide a substantiated prognosis of prices for oil, gas, and metals, it is dangerous for the country."

Some Russia media are even more skeptical. Moskovsky Komsomolets carries a full-page article, titled "Kasyanov's Crap," illustrated with graphs showing that in the "lucky" years of 2001-2002, 50-56% of Russians characterize the economic situation as "bad" and "very bad."

Russian Analyst Sees U.S. and World Economic Crisis As Systemic

In a lengthy review of the crisis dynamics in the U.S. economy, published Aug. 5, the economics commentator for the daily Vremya, Alexander Deikin, explained that the current crisis can't be compared with "classical" fluctuations, as described in Marxist and post-Marxist textbooks of economy; and secondly, that the major challenge faced by the Bush Administration, as well as Putin's Administration, is the lack of ideas.

"The crisis is non-classical, but it is likely to be much more important for the United States, the whole world, and Russia in particular, than any 'regular' crisis has been," emphasizes Deikin," emphasizes the author. While noting the role of the recent accounting scandals, he stressed the delusions in the minds of Americans: "Until this last year, Americans had gotten used to a rapid growth of incomes. Warnings from economists that a financial bubble was inflating, were not heeded, since the virtual growth of stock quotations allowed top managers to capitalize a lot in cash, and enjoy huge (arbitrarily calculated) salaries and bonuses. Before the bubble burst, employees never questioned why on Earth the wages of the [company] president exceeds their own by a factor of 592 times. ..."

Deikin also zeroed in on the irrational "faith in the U.S. currency," on which "the illusion of stability of the U.S. economy" was based. "Although the balance of payments was deteriorating, stocks continued to rise and foreigners continued to invest.... Finally, the huge payment and trade deficit signalled to speculators that they had to get their incomes as soon as possible, and the noise over 'dollar's overevaluation' " began.

Deikin concluded, "The incumbent [American] President is surrounded with deficits from all sides: deficit of the Federal budget, payment balance, and qualified cadres. However, the major deficit, traditional for the Republicans, is the lack of ideas.... In this global whirlwind, Russia may win or lose, depending on its goals and strategy.... The major task is to overcome 'the Bush syndrome,' and allow new ideas into the economy."

Russian Raw Materials Policy: In the National Interest, or Resources Grab?

Turmoil continues around the reportedly pending plan of Russian Presidential Administration official Dmitri Kozak, to change ownership and/or taxation policies for the country's natural resources. As EIW has reported, elements of the plan, (as described in a version leaked by Interfax in late July) echo Academician Dmitri Lvov's often repeated demand, to "place our national wealth on the balance sheet of the state." Various Russian papers, joined by The Wall Street Journal, shrieked that the cancellation of licenses for raw-materials exploitation, and their replacement by a concession system, would mean "re-nationalization." Proposals for revising the Law on Natural Resources are due to be submitted to the government by Oct. 1.

The similarities to Lvov's proposals were not missed. Christopher Kenneth, in The Russia Journal of Aug. 2-8, noted that Kozak's reported recommendation "echoes a similar view expressed earlier this year in national media by Dmitri Lvov," who had told Pravda: "If the major part of our national income is generated not by labor and capital but from rents on natural resources, then these assets should not be made a subject for private entrepreneurship, which channels revenues to only a select few. Rather, the assets should belong to all Russians.... A law to make the state the sole owner with rights to exploit these resources, and making concerted efforts to forestall any further attempt to sell government's stakes in this sector, would be a big step forward in correcting the situation."

As reported in our second item this week, Academician Lvov, Dr. Sergei Glazyev, and other Russian Academy of Sciences economists met with President Putin in March, but there had been little reflection of those discussions in policy, until reports surfaced about the Kozak plan.

Menshikov Comments on Reports of Kozak Plan

Professor Stanislav Menshikov, who has been favorable to Academician Lvov's concept, analyzed the Kozak proposal, in his Aug. 2 column in The Moscow Tribune.

This "really surprising" document, Menshikov says, "claims that not only all mineral deposits belong to the state, but also the products of their exploitation. If this document is adopted, oil companies will lose their current licenses for oil fields and will have to sign concession agreements, under which they would be compensated for costs plus a 'normal profit', but the remaining revenue would belong to the government. It is no secret that oil companies reap an enormous super profit from their low production costs and the much higher world prices. Last year, Putin suggested taxing away most of that mineral rent and using it to finance manufacturing, particularly high-tech industries. Due to sabotage from the Kasyanov cabinet, nothing came out of this idea. Today the President has returned to his old plan and put it into an extreme form that is close to de facto nationalization."

Since the Kozak plan would likely be opposed by the Kasyanov cabinet and "either buried or emasculated on the way to Parliament," Menshikov suggested that it might become "another test of strength between the President and the Prime Minister, with the oligarchs taking Kasyanov's side this time around." Or, Putin might have let the proposal come out "for tactical reasons," having to do with showing the oil magnates "who is boss." Menshikov concluded, "Dancing with the oil and nickel wolves is dangerous business. Who wins is anybody's guess."

When Putin called for the repatriation of Russian flight capital, two months ago, he promptly closeted himself with former Mezhkombank chief Sergei Pugachov, to hammer out detailed proposals. In the case of the raw-materials legislation, too, the raw-materials magnates quickly entered the picture. Yukos Oil's owner, Mikhail Khodorkovsky, supported the Kozak plan, as did Mikhail Fridman, chairman of Alfa Group, who said, "It doesn't matter whether it's called a concession or a licensing agreement. What is important, is that the government cannot tear it up unilaterally." Each of them met with Kozak the week of July 29. The Moscow Times and Vedomosti reported Aug. 5 and Aug. 7, respectively, that Kozak's draft law has been revised so as to not transfer to the state, ownership of the resources in the ground, after all, but to increase taxes collected at the wellhead.

Deterioration of Russian-Georgian Relations

On Aug. 8, Georgia agreed to extradite a group of Chechen mercenaries to Russia, after Russian special services provided videotaped evidence of the involvement of Georgian military and customs officials in deployment of terrorists across the border into Russia. This evidence also implicates Azerbaijan, as the mercenaries were reportedly hired in Baku through a company functioning as a travel agency. The video showed a terrorist describing how Georgian officials in Pankisi Gorge protected him.

During the past two weeks, accusations have flown back and forth between Moscow and Tbilisi, after Chechen guerrillas retreated from heavy fighting with Russian forces in Chechnya, back into Pankisi Gorge. Georgia protested Russian military aircraft overflights of Pankisi Gorge, and initially refused to extradite two groups of Chechens, captured on the Georgian side. Oleg Mironov, speaker of the Russian Federation Council (upper house of Parliament), inflamed the situation by proposing that Russia emulate Ariel Sharon's military operations on the West Bank, and go into Georgia in force to wipe out the guerrillas' bases there.

This deterioration of the Russian-Georgian relations takes place on the eve of signing of a comprehensive Friendship and Cooperation Treaty between the two countries. But there is political instability in Georgia, where no clear leading force emerged in recent local elections, and there is more and more open discussion about the succession to President Eduard Shevardnadze.

All rights reserved © 2002 EIRNS